Materi UAS CFM Theory

Chapter 10 “Capital Budgeting Techniques”

1. Capital Budgeting  The process of evaluating and selecting long-term investments that are
consistent with the firm’s goal of maximizing owners wealth

2. Capital Expenditure An outlay of funds by the firm that is expected to produce benefits
over a period of time greater than 1 year

3. Operating Expenditure An outlay of funds by the firm resulting in benefits received within 1
year

4. Step in capital budgeting Process:

a. Proposal Generation
b. Review & analysis
c. Decision Making
d. Implementation
e. Follow-up

5. Independent project Projects whose cash flows are unrelated to one another, so the
acceptance of one does not eliminate the others from further consideration

6. Mutually exclusive project Projects that compete with one another so that the acceptance
of one eliminates from further consideration all other projects that serve a similar function

7. Unlimited funds The financial situation in which a firm is able to accept all independent
projects that provide an acceptable return

8. Capital rationing The financial situation in which a firm has only a fixed number of dollars
available for capital expenditures and numerous projects compete for these dollars.

9. Accept-reject approach the evaluation of capital expenditure proposals to determine

whether they meet the firms minimum acceptance criterion

10. Ranking approach the ranking of capital expenditure projects on the basis of some
predetermined measure, such as the rate of return

11. 3 most popular capital budgeting techniques:

a. Payback period
b. Net present value
c. Internal rate of return

12. Payback period the amount of time required for a firm to recover its initial investment in a
project as calculated from cash inflows

Payback period weakness:

• The appropriate payback period is merely a subjectively determined number

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 • This approach fails to take fully into account the time factor in the value of money
• Its failure to recognize cash flows that occur after the payback period

13. Net present value A sophisticated capital budgeting technique, found by subtracting a
project’s initial investment from the present value of its cash inflows discounted at a rate
equal to the firm’s cost of capital

14. Pure economic profit  a profit above and beyond the normal competitive rate of return in a
line of business

15. Internal rate of return (IRR) the discount rate that equates the NPV of an investment
opportunity with 0, it is the rate of return that the firm will earn if it invests in the project and
receives the given cash inflows

16. Net present value profile graph that depicts a project’s NPVs for various discount rates

17. Conflicting rankings conflicts in the ranking given a project by NPV and IRR, resulting from
differences in the magnitude and timing of cash flows

18. Intermediate cash inflowscash inflows received prior to the termination of a project

19. Which approach is better?

a. Theoretical view
NPV is better, because it measures how much wealth a projects creates. And NPV has
the clearest link to this objective and therefore is the “gold standard” for evaluating
investment opportunites.
b. Practical view
Because interest rates, profitability, and so on are most often expressed as annual
rates of return, the use of IRR makes sense to financial decision makers. And IRR
widespread use does not imply a lack of sophistication on the part of financial
decision makers.

Chapter 11 “Capital Budgeting Cash Flows”

1. Relevant cash flows the incremental cash outflow and resulting subsequent inflows
associated with a proposed capital expenditure

2. Incremental cash flows the additional cash flows-outflows or inflows-expected to

result from a proposed capital expenditure

3. 3 Basic components of cash flows:

a. An initial investment
The relevant cash outflow for a proposed project at time zero

b. Operating cash flows

The incremental after-tax cash inflows resulting from implementation of a
project during its life

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 c. Terminal cash flow
The after-tax non-operating cash flow occurring in the final year of a project. It
is usually attributable to liquidation of the project

4. Sunk costs cash outlays that have already been made and therefore have no effect
on the cash flows relevant to a current decision

5. Opportunity costs cash flows that could be realized from the best alternative use of
an owned asset

6. Foreign direct investment the transfer of capital, managerial, and technical assets
to a foreign country

7. International capital budgeting differs from the domestic version because

a. Cash outflows and inflows occur in a foreign currency
b. Foreign investments entail potentially significant political risk

8. Cost of new asset the net outflow necessary to acquire a new asset

9. Installation costs any added costs that are necessary to place an asset into
operation

10. Installed cost of new asset the cost of new asset plus its installation cost, equals the
asset’s depreciable value

11. After-tax proceeds from sale of old asset the difference between the old asset’s
sale proceeds and any applicable taxes or tax refunds related to its sale

12. Proceeds from sale of old asset the cash inflows, net of any removal or cleanup
costs, resulting from the sale of an existing asset

13. Tax on sale of old assettax that depends on the relationship between the old asset’s
sale price and book value and on existing government tax rules.

14. Book value the strict accounting value of an asset, calculated by subtracting its
accumulated depreciation from its installed cost
15. Recaptured depreciation  the portion of an asset’s sale price that is above its book
value and below its initial purchase price

16. Net working capital the difference between the firm’s current assets and its current
liabilities

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 17. Change in net working capital  the difference between a change in current assets
and a change in current liabilities
Chapter 13 “Leverage & capital structure”
1. Leverage refers to the effects that fixed costs have on the returns that shareholders
earn, higher leverage generally results in higher but more volatile returns.

2. Capital structure the mix of long-term debt and equity maintained by the firm

3. Operating leverage concerned with the relationship between the firm’s sales
revenue and its earnings before interest and taxes or operating profits

4. Financial leverage concerned with the relationship between the firm’s EBIT and its
common stock earning per share.

5. Total leverage the combined effect of operating and financial leverage (concerned
with the relationship between the firm’s sales revenue and EPS)

6. Breakeven analysis used to indicate the level of operations necessary to cover all
costs and to evaluate the profitability associated with various levels of sales, also
called cost-volume-profit analysis

7. Operating breakeven point the level of sales necessary to cover all operating costs,
the point at which EBIT=0

8. Degree of operating leverage (DOL)  The numerical measure of the firm’s operating
leverage.

9. Degree of financial leverage (DFL) The numerical measure of the firm’s financial
leverage.

10. Degree of total leverage (DTL) The numerical measure of the firm’s total leverage

11. Asymmetric information  the situation in which managers of a firm have more
information about operations and future prospects than do investors
12. Pecking order theory a hierarchy of financing that begins with retained earnings,
which is followed by debt financing and finally external equity financing

13. Signaling theory a financing action by management that is believed to reflect its
view of the firm’s stock value. Generally, debt financing is viewed as a positive signal
that management believes the stock is “undervalued”, and a stock issue is viewed as a
negative signal that management believes the stock is “overvalued”.

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 14. Optimal capital structure the capital structure at which the weighted average cost
of capital is minimized, thereby maximizing the firm’s value.

15. EBIT-EPS Approach an approach for selecting the capital-structure that maximizes
EPS over the expected range of EBIT

16. Financial Breakeven point the level of EBIT necessary to just cover all fixed financial
costs, the level of EBIT for which EPS = 0

17. Important factors to consider in making capital structure decisions

a. Business risk (Revenue stability, Cash flow)
b. Agency costs (Contractual obligations, management preferences, control)
c. Asymmetric information (External risk assessment, timing)
Chapter 14 “Payout policy”
1. Payout policy decisions that a firm makes regarding whether to distribute cash to
shareholders, how much cash to distribute, and the means by which cash should be
distributed

2. Date of record set by the firm’s director, the date on which all persons whose
names are recorded as stockholders receive a declared dividend at a specified future
time

3. Ex dividend  a period beginning 2 business days prior to the date of record, during
which a stock is sold without the right to receive the current dividend

4. Payment date set by the firm’s directors, the actual date on which the firm mails
the dividend payment to the holders of record

5. Open-market share repurchase a share repurchase program in which firms simply

but back some of their outstanding shares on the open market

6. Tender offer share repurchase a repurchase program in which a firm offers to

repurchases a fixed number of shares, usually at a premium relative to the market
value, and shareholders decide whether or not they want to sell back their shares at
that price.

7. Dutch auction share repurchase a repurchase method in which the firm specifies
how many shares it wants to buy back and a range of prices at which it is willing to
repurchase shares. Investors specify how many shares they will sell at each price in
the range and the firm determines the minimum price required to repurchase its
target number of shares. All investor who tender receive the same price.

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8. Dividend reinvestment plans plans that enable stockholders to use dividends
received on the firm’s stock to acquire additional shares-even fractional shares- at
little or no transaction cost.

9. Residual theory of divvidens a school of thought that suggests that the dividend
paid by a firm should be viewed as a residual, the amount left over after all acceptable
investment opportunities have been undertaken

10. Dividend irrelevance theory  miller and modigliani’s theory that, in a perfect world,
the firm’s value is determined solely by the earning power and risk of its assets and
that the manner in which it splits its earnings stream between dividends and
internally retained funds does not affect this value.

11. Clientele effect the argument that different payout policies attract different types
of investors but still do not change the value of the firm

12. Dividend relevance theory the theory, advanced by gordon and lintner, that there is
a direct relationship between a firm’s dividend policy and its market value

13. Bird-in-the-hand argument the belief, in support of dividend relevance theory, that
investors see current dividens as less risky than future dividends or capital gains.

14. Informational content the information provided by the dividends of a firm with
respect to future earnings, which causes owners to bid up or down the price of the
firm’s stock

15. Dividend policy the firm’s plan of action to be followed whenever it makes a
dividend decision

16. Excess earnings accumulation tax  the tax the IRS levies on retained earnings above
$ 250,000 for most businesses when it determines that the firm has accumulated an
excess of earnings to allow owners to delay paying ordinary income taxes on
dividends received.

17. Catering theory a theory that says firms cater to the preferences of investors,
initiating or increasing dividend payments during periods in which high-dividend
stocks are particularly appealing to investors

18. Dividend payout ratio indicates the percentage of each dollar earned that a firm
distributes to the owners in the form of cash. It is calculated by dividing the firm’s
cash dividend per share by its earnings per share

19. Constant payout ratio dividend policy a dividend policy based on the payment of a
certain percentage of earnings to owners in each dividend period

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 20. Regular dividend policy a dividend policy based on the payment of a fixed dollar
dividend in each period

21. Target dividend payout ratio a dividend policy under which the firm attempts to
pay out a certain percentage of earnings as a stated dollar dividend and adjusts that
dividend toward a target payout as proven earnings increases occur

22. Low regular and extra dividend policy a dividend policy based on paying a low
regular dividend, supplemented by an additional dividend when earnings are higher
than normal in a given period

23. Extra dividendan additional dividend optionally paid by the firm when earnings are
higher than normal in a given period

24. Stock dividend the payment to existing owners, of a dividend in the form of stock

25. Small stock dividend a stock dividend representing less than 20% to 25% of the
common stock outstanding when the dividend is declared

26. Stock split a method commonly used to lower the market price of a firm’s stock by
increasing the number of shares belonging to each shareholder

27. Reverse stock split a method used to raise the market price of a firm’s stock by
exchanging a certain number of outstanding shares for one new share
Chapter 15 Working capital and current asset management
1. Working capital management management of current assets and current liabilities
2. Working capital current assets, which represent the portion of investment that
circulates from one form to another in the ordinary conduct of business

3. Net working capital the difference between the firm’s current assets and its current
liabilities

4. Profitabilitythe relationship between revenues and cost generated by using firm’s

assets in productive activities

5. Risk (of insolvency) the probability that a firm will be unable to pay its bills as they
come due

6. Insolvent describes a firm that is unable to pay its bills as they come due

7. Cash conversion cyclethe length of time required for a company to convert cash
invested in its operations to cash received as a result of its operations

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8. Operating cycle the time from the beginning of the production process to collection
of cash from the sale of the finished product

9. Permanent funding requirementconstant investment in operating assets resulting

from constant sales over time

10. Seasonal funding managementan investment in operating assets that varies over
time as a result of cyclic sales

11. Aggressive funding strategy a funding strategy under which the firm funds its
seasonal requirements with short term debt and its permanent requirements with
long term debt

12. Conservative funding strategy a funding strategy under which the firm funds both
its seasonal and its permanent requirements with long term debt

13. ABC inventory system inventory management technique that divides inventory into
3 groups (A,B, and C) in descending order of importance and level of monitoring on
the basis of the dollar investment in each

14. Two bin method unsophisticated inventory monitoring technique that is typically
applied to C group items and involves reordering inventory when one of two bins is
empty
15. Economic order quantity (EOQ) model inventory management technique for
determining an item’s optimal order size, which is the size that minimizes the total of
its order costs and carrying costs

16. Order costs the fixed clerical costs of placing and receiving an inventory order

17. Carrying costs the variable costs per unit of holding an item in inventory for a
specific period of time.

18. Total cost of inventory the sum of order costs and carrying costs of inventory

19. Reorder point the point at which to reorder inventory, expressed ad days of lead
time x daily usage

20. Safety stock extra inventory that is held to prevent stockouts of important items

21. Just in time system inventory management technique that minimizes inventory
investment by having materials arrive at exactly the time they are needed for
production

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22. Materials requirement planning (MRP) system  inventory management technique
that applies EOQ concepts and a computer to compare production needs to available
inventory balances and determine when orders should be placed for various items on
a product’s bill of materials

23. Manufacturing resource planning II a sophisticated computerized system that

integrates data from numerous areas such as finance, accounting, marketing,
engineering, and manufacturing and generates production plans as well as numerous
financial and management reports

24. Enterprise resource planning (ERP) a computerized system that electronically

integrates external information about the firm’s suppliers and customers with the
firm’s departmental data so that information on all available resources- human and
material- can be instantly obtained in a fashion that eliminates production delays and
controls costs

25. Credit standards the firm’s minimum requirements for extending credit to a
customer

26. 5 C of credit
a. Character = The applicant’s record of meeting past obligations
b. Capacity = The applicant’s ability to repay the requested credit, as judged in
terms of financial statement analysis focused on cash flow available to repay
debt obligations
c. Capital = the applicant’s debt relative to equity
d. Collateral = the amount of assets the applicant has available for use in
securing the credit
e. Conditions = current general and industry-specific economic conditions and
any unique conditions surrounding a specific transaction

27. Credit scoring a credit selection method commonly used with high-volume/small-
dollar credit request, relies on a credit score determined by applying statistically
derived weights to a credit applicant’s score on key financial and credit characteristics

28. Credit terms the terms of sale for customers who have been extended credit by the
firm

29. Cash discount a percentage deduction from the purchase price, available to the
credit customer who pays its account within a specified time

30. Cash discount period the number of days after the beginning of the credit period
during which the cash discount is available

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31. Credit period  the number of days after the beginning of the credit period until full
payment of the account is due

32. Credit monitoringthe ongoing review of a firm’s account receivable to determine

whether customers are paying according to the stated credit terms

33. Aging schedule a credit-monitoring technique that breaks down accounts

receivable into groups on the basis of their time of origin, it indicates the percentages
of the total accounts receivable balance that have been outstanding for specified
periods of time

34. Float funds that have been sent by the payer but are not yet usable funds to the
payee

35. Mail float the time delay between when payment is placed in the mail and when it
is received

36. Processing float the time between receipt of a payment and its deposit into the
firm’s account
37. Clearing float  the time between deposit of a payment and when spendable funds
become available to the firm

38. Lockbox system a collection procedure in which customers mail payments to a post
office box that is emptied regularly by the firm’s bank, which processes the payments
and deposits them in the firm’s account. This system speeds up collection time by
reducing processing time as well as mail and clearing time.

39. Controlled disbursing the strategic use of mailing points and bank accounts to
lengthen mail float and clearing float, respectively

40. Cash concentration the process used by the firm to bring lockbox and other
deposits together into one bank, often called the concentration bank

41. Depository transfer check an unsigned check drawn on one of a firm’s bank
accounts and deposited in another

42. Automated clearinghouse transfer preauthorized electronic withdrawal from the

payer’s account and deposit into the payee’s account via a settlement among banks
by the automated clearinghouse

43. Wire transfer  an electronic communication that, via bookkeeping entries, removes
funds from the payer’s bank and deposits them in the payee’s bank

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 44. Zero-balance account a disbursement account that always has an end-of day
balance of zero because the firm deposits money to cover checks drawn on the
account only as they are presented for payment each day
Chapter 16 Current liabilities management
1. Spontaneous liabilities financing that arises from the normal course of business, the
2 major short-term sources of such liabilities are accounts payable and accruals

2. Unsecured short-term financing short-term financing obtained without pledging

specific assets as collateral

3. Account payable management management by the firm of the time that elapses
between its purchases of raw materials and its mailing payment to the supplier

4. Cost of giving up a cash discount the implied rate of interest paid to delay payment
of an account payable for an additional number of days
5. Stretching accounts payable paying bills as late as possible without damaging the
firm’s credit rating

6. Accruals liabilities for services received for which payment has yet to be made

7. Short-term, self-liquidating loan an unsecured short-term loan in which the use to

which the borrowed money is put provides the mechanism through which the loan is
repaid

8. Prime rate of interest (prime rate)the lowest rate of interest charged by leading
banks on business loans to their most important business borrowers

9. Fixed-rate loan  a loan with a rate of interest that is determined at a set increment
above the prime rate and remains unvarying until maturity

10. Floating-rate loan a loan with a rate of interest initially set at an increment above
the prime rate and allowed to float, or vary, above prime as the prime rate varies until
maturity

11. Discount loan loan on which interest is paid in advance by being deducted from the
amount borrowed

12. Single-payment note a short-term, one time loan made to a borrower who needs
funds for a specific purpose for a short period

13. Line of credit an agreement between a commercial bank and a business specifying
the amount of unsecured short-term borrowing the bank will make available to the
firm over a given period of time

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14. Operating-change restrictions contractual restrictions that a bank may impose on a
firm’s financial condition or operations as part of a line-of credit agreement

15. Compensating balance a required checking account balance equal to a certain

percentage of the amount borrowed from a bank under a line-of-credit or revolving
credit agreement

16. Annual cleanup the requirement that for a certain number of days during the year
borrowers under a line of credit carry a zero loan balance

17. Revolving credit agreement a line of credit guaranteed to a borrower by a

commercial bank regardless of the scarcity of money
18. Commitment fee the fee that is normally charged on a revolving credit agreement,
it often applies to the average unused portion of the borrower’s credit line

19. Commercial paper a form of financing consisting of short-term, unsecured

promissory notes issued by firms with a high credit standing

20. Letter of credit a letter written by a company’s bank to the company’s foreign
supplier, stating that the bank guarantees payment of an invoiced amount if all the
underlying agreements are met

21. Secured short-term financingshort-term financing (loan) that has specific assets
pledged as collateral

22. Security agreement  the agreement between the borrower and the lender that
specifies the collateral held against a secured loan

23. Percentage advancethe percentage of the book value of the collateral that
constitutes the principal of secured loan

24. Commercial finance companies lending institutions that make only secured loans-
both short-term and long-term to businesses

25. Pledge of accounts receivable the use of a firm’s accounts receivable as security, or
collateral, to obtain a short-term loan

26. Lien a publicly disclosed legal claim on loan collateral

27. Non notification basis the basis on which a borrower, having pledged on account
receivable, continues to collect the account payments without notifying the account
customer

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 28. Notification basis the basis on which an account customer whose account has been
pledged is notified to remit payment directly to the lender

29. Factoring account receivable the outright sale of accounts receivable at a discount
to a factor or other financial institution

30. Factor a financial institution that specializes in purchasing account receivable from
businesses

31. Nonrecourse basis the basis on which accounts receivable are sold to a factor with
the understanding that the factors accepts all credit risks on the purchased accounts

32. Floating inventory lien a secured short term loan against inventory under which the
lender’s claim is on the borrower’s inventory in general

33. Trust receipt inventory loan a secured short term loan against inventory under
which the lender advances 80 to 100 % of the cost of the borrower’s relatively
expensive inventory items in exchange for the borrower’s promise to repay the
lender, with accrued interest, immediately after the sale of each item of collateral

34. Warehouse receipt loan a secured short term loan against inventory under which
the lender receives control of the pledged inventory collateral, which is stored by a
designated warehousing company on the lender’s behalf
Chapter 17 Hybrid and Derivative securities
1. Hybrid security a form of debt or equity financing that possesses characteristics of
both debt and equity financing

2. Derivative security a security that is neither debt nor equity but derives its value
from an underlying asset that is often another security called derivative for short

3. Leasing  the process by which a firm can obtain the use of certain fixed assets for
which it must make a series of contractual, periodic, tax-deductible payments

4. Lessee  the receiver of the services of the assets under a lease contract

5. Lessor the owner of assets that are being leased

6. Operating lease a cancelable contractual arrangement whereby the lessee agrees

to make periodic payments to the lessor, often for 5 or fewer years, to obtain an
asset’s services, generally, the total payments over the term of the lease are less than
the lessor’s initial cost of the leased asset

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7. Financial/capital lease a longer-term lease than an operating lease that is
noncancelable and obligates the lessee to make payments for the use of an asset over
a predefined period of time; the total payments over the term of the lease are greater
than the lessor’s initial cost of the leased asset

8. Direct lease  a lease under which a lessor owns or acquires the assets that are
leased to a given lessee
9. Sale-leaseback arrangement a lease under which the lessee sells an asset to a
prospective lessor and then leases hack the same asset, making fixed periodic
payments for its use

10. Leveraged lease a lease under which the lessor acts as an equity participant,
supplying only about 20% of the cost of the assets, while a lender supplies the
balance

11. Maintenance clauses provisions normally included in an operating lease that

require the lessor to maintain the assets and to make insurance and tax payments

12. Renewal optionsprovisions especially common in operating leases that grant the
lessee the right to release assets at the expiration of the lease

13. Purchase options provisions frequently included in both operating and financial
leases that allow the lessee to purchases the leased asset at maturity, typically for a
prespecified price

14. Lease vs purchase decision the decision facing firms needing to acquire new fixed
assets, whether to lease the assets or to purchase them, using borrowed funds or
available liquid resources

15. Capitalized lease a financial lease that has the present value of all its payments
included as an asset and corresponding liability an firm’s balance sheet, as required
by the FASB no 13

16. Advantage and disadvantages of leasing (Hlm 740)

17. Conversion feature an option that is included as part of a bond or a preferred stock
issue and allows its holder to change the security into a stated number of shares of
common stock

18. Convertible bond a bond that can be changed into a specified number of shares of
common stock

19. Straight bond a bond that is nonconvertible, having no conversion feature

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20. Convertible preferred stock preferred stock that can be changed into a specified
number of shares of common stock

21. Straight preferred stock  preferred stock that is nonconvertible, having no

conversion feature
22. Conversion ratio the ratio at which a convertible security can be exchanged for
common stock

23. Conversion price the per-share price that is effectively paid for common stock as
the result of conversion of a convertible security

24. Conversion value the value of a convertible security measured in terms of the
market price of the common stock into which it can be converted

25. Contigent securities convertibles, warrants, and stock options. Theirs presence
affects the reporting of a firm’s EPS

26. Basic EPS EPS calculated without regard to any contingent securities

27. Diluted EPS EPS calculated under the assumption that all contingent securities that
would have dilutive effects are converted and exercised and are therefore common
stock

28. Overhanging issue a convertible security that cannot be forced into conversion by
using the call feature

29. Straight bond value the price at which a convertible bond would sell in the market
without the conversion feature

30. Market premium the amount by which the market value exceeds the straight or
conversion value of a convertible security

31. Stock purchase warrants instruments that give their holders the right to purchase a
certain number of shares of the issuer’s common stock at a specified price over a
certain period of time

32. Exercise/option price the price at which holders of warrants can purchase a
specified number of shares of common stock

33. Implied price of a warrantthe price effectively paid for each warrant attached to a
bond

34. Warrant premium the difference between the market value and the theoretical
value of a warrant

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 35. Option an instrument that provides its holder with an opportunity to purchase or
sell a specified asset at a stated price on or before a set expiration date

36. Call optionan option to purchase a specified number of shares of a stock on or

before a specified future date at a stated price

37. Strike price the price at which the holder of a call option can buy a specified
amount of stock at any time prior to the option’s expiration date.

38. Put option an option to sell a specified number of shares of a stock on or before a
specified future date at a stated price

39. Hedging offsetting or protecting against the risk of adverse price movements
Chapter 18 mergers, LBOs, Divestitures, and Business failure
1. Corporate restructuring the activities involving expansion or contraction of a firm’s
operations or changes in its asset or financial structure

2. Merger the combination of 2 or more firms, in which the resulting firm maintains the
identity of one of the firms, usually the larger

3. Consolidation the combination of 2 or more firms to form a completely new corporation

4. Holding company a corporation that has voting control of one or more other corporations

5. Subsidiaries the companies controlled by a holding company

6. Acquiring company the firm in a merger transaction that attempts to acquire another firm

7. Target company the firm in a merger transaction that the acquiring company is pursuing

8. Friendly merger  a merger transaction endorsed by the target firm’s management,

approved by its stockholders, and easily consummated

9. Hostile merger a merger transaction that the target firm’s management does not support,
forcing the acquiring company to try to gain control of the firm by buying shares in the
marketplace

10. Strategic merger a merger transaction undertaken to achieve economies of scale

11. Financial merger a merger transaction undertaken with the goal of restructuring the
acquired company to improve its cash flow and unlock its unrealized value
12. Tax loss carry forward in a merger, the tax loss of one of the firms that can be applied
against a limited amount of future income of the merged firm over 20 years or until the total
tax loss has been fully recovered, whichever comes first

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13. Horizontal merger  a merger of 2 firms in the same line of business

14. Vertical merger  a merger in which a firm acquires a supplier or a customer

15. Congeneric merger a merger in which one firm acquires another firm that is in the same
general industry but is neither in the same line of business nor a supplier or customer

16. Conglomerate merger a merger combining firms in unrelated businesses

17. Leveraged buyout (LBO) an acquisition technique involving the use of a large amount of
debt to purchase a firm (cth financial merger)

18. Operating unit a part of a business, such as a plant, division, product line, or subsidiary, that
contributes to the actual operations of the firm

19. Divestiture the selling of some of a firm’s assets for various strategic reasons

20. Spin-off  a form of divestiture in which an operating unit becomes an independent

company through the issuance of shares in it, on a pro rata basis, to the parent company’s
shareholders

21. Breakup value the value of a firm measured as the sum of the values of its operating units if
each were sold separately

22. Stock swap transaction an acquisition method in which the acquiring firm exchanges its
shares for shares of the target company according to a predetermined ratio

23. Ratio of exchange the ratio of the amount paid per share of the target company to the
market price per share of the acquiring firm

24. Ratio of exchange in market price  indicates the market price per share of the acquiring
firm paid for each dollar of market price per share of the target firm

25. Investment bankers financial intermediaries who, in addition the their role in selling new
security issues, can be hired by acquirers in mergers to find suitable target companies and
assist in negotiations

26. Two-tier offer a tender offer in which the terms offered are more attractive to those who
tender shares early

27. Takeover defenses strategies for fighting hostile takeovers

28. White knight a takeover defense in which the target firm finds an acquirer more to its liking
than the initial hostile acquirer and prompts the 2 to compete to take over the firm

29. Poison pill a takeover defense in which a firm issues securities that give their holders
certain rights that become effective when a takeover is attempted, these rights make the
target firm less desirable to a hostile acquirer

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30. Greenmaila takeover defense under which a target firm repurchases, through private
negotiation, a large block of stock at a premium from one or more shareholders to end a
hostile takeover attempt by those shareholders

31. Leveraged recapitalization a takeover defense in which the target firm pays a large debt-
financed cash dividend, increasing the firm’s financial leverage and thereby deterring the
takeover attempt

32. Golden parachutes provisions in the employment contracts of key executives that provide
them with sizable compensation if the firm is taken over, deters hostile takeovers to the
extent that the cash outflows required are large enough to make the takeover unattractive

33. Shark repellents antitakeover amendments to a corporate charter that constrain the firm’s
ability to transfer managerial control of the firm as a result of a merger

34. Pyramiding an arrangement among holding companies wherein one holding company
controls other holding companies, thereby causing an even greater magnification of earnings
and losses

35. Advantages and disadvantages of holding companies (Hlm 788-789)

36. InsolvencyBusiness failure that occurs when a firm is unable to pay its liabilities as the come
due

37. Bankruptcy business failure that occurs when the stated value of a firm’s liabilities exceeds
the fair market value of its assets

38. Voluntary settlement an arrangement between an insolvent or bankrupt firm and its
creditors enabling it to bypass many of the costs involved in legal bankruptcy proceedings

39. Extension an arrangement whereby the firm’s creditors receive payment in full, although
not immediately

40. Composition a pro rata cash settlement of creditor claims by the debtor firm, a uniform %
of each dollar owed is paid

41. Creditor control an arrangement in which the creditor committee replaces the firm’s
operating management and operates the firm until all claims have been settled

42. Assignment a voluntary liquidation procedure by which a firm’s creditors pass the power to
liquidate the firm’s assets to an adjustment bureau, a trade association, or a third party,
which is designated the assignee

43. Bankruptcy reform act of 1978  the governing bankruptcy legislation in the united states
today

Chapter 7

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 The portion of the bankruptcy reform act of 1978 that details the procedures to be followed
when liquidating a failed firm

Chapter 11
The portion of the bankruptcy reform act of 1978 that cutlines the procedures for
reorganizing a failed firm, whether its petition is filed voluntary or involuntary

44. Voluntary reorganization a petition filed by a failed firm on its own behalf for reorganizing
its structure and paying its creditors

45. Involuntary reorganization a petition initiated by an outside party, usually a creditor, for
the reorganization and payment of creditors of a failed firm

46. Debtor in possession  the term for a firm that files a reorganization petition under chapter
11 and then develops, if feasible, a reorganization plan

47. Recaptalization the reorganization procedure under which a failed firm’s debts are
generally exchanged for equity or the maturities of existing debts are extended

48. Secured creditors creditors who have specific assets pledged as collateral and, in
liquidation of the failed firm, receive proceeds from the sale of those assets

49. Unsecured, or general, creditors creditors who have a general claim against all the firm’s
assets other than those specifically pledged as collateral

Break even point analysis

Adalah suatu teknik menganalisis pelaku hubungan biaya biaya (biaya tetap dan biaya variable)
sehingga dapat diketahui tingkat penjualan keberapa perusahaan masih mengalami rugi, pada
penjualan keberapa mengalami impas dan mulai penjualan keberapa mengalami laba (lab
operasi) atas suatu atau beberapa produk yang dijual
Analisis BEP Leverage
Ebit = Sales – Total Cost
= P x Q – [FC+(VC x Q)]
BEP terjadi jika total sales atau revenue = TC
Artinya P x Q = FC+VC
P x Q – VC x Q = FC
Maka rumus BEP dalam unit QBep = FC/(P-VC)
Rumus BEP dalam nilai uang = QBep x P

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3 JENIS LEVERAGE
1. Operating leverage (DOL)
 Suatu derajat atau tingkat yang mengukur seberapa besar pengaruh perubahan
penjualan terhadap perubahan EBIT

DOL pada unit: Q x (P-VC)/Q x (P-VC) – FC

DOL : % change EBIT / % change in sales

2. Financial leverage (DFL)

 Suatu derajat atau tingkat yang mengukur seberapa besar pengaruh perubahan
EBIT terhadap perubahan EPS

DFL pada EBIT : EBIT / EBIT – I – [Preferred Dividend x 1/(1-Tax)]

DFL : % change EPS / % change EBIT

3. Total Leverage (DTL)

 Suatu derajat atau tingkat yang mengukur seberapa besar pengaruh perubahan
penjualan terhadap perubahan EPS

DTL : DOL x DFL

DTL : % change EPS / % change Sales

Current Asset Management

Working capital adalah sejumlah dana yang dimiliki perusahaan untuk membiayai
kegiatan operasional sehari-hari.

Konsep working capital dapat dilihat dari aspek :

- Gross working capital

- Net working capital

Cara perhitungan working capital :

CCC = AAI + ACP – APP

OC = AAI + ACP
CCC = OC - APP

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 CCC : Cash convension cycle
AAI : average age of inventory
ACP : average collection period
APP : average payment period
OC : operating cycle
 Inventory/COGS x 365
 Account receivables/sales x 365
 Account payable/purchase x 365

CCC adalah suatu siklus perubahan kas: berapa lama kas nya dapat kembali?

Inventory :

Teknik pengelolaan persediaan

1. ABC Inventory system

Adalah suatu teknik pengelolan dengan cara menggolong-golongkan
persediaan berdasarkan jenis dan mutunya

2. Just in time (JIT)

Adalah suatu teknik pengelolaan persediaan dengn cara mengatur arus atau
pergerakan persediaan sedemikian rupa seni

3. EOQ Model (Economy order quantity)

Suatu teknik pengelolaan persediaan dengan cara bagaimana menentukan

jumlah pemesanan optimum dari pengurangan

Analisis EOQ Model

- Order cost : semua biaya pemesanan yang dikeluarkan terhitung sejak dibuatnya
surat pemesanan hingga persediaan diterima di gudang

Rumus : O x S/Q
S : kebutuhan dalam 1 periode
O : Order cost per order
Q : order quantity in unit

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 C : carrying cost per unit per period
- Carrying cost : semua biaya yang dikeluarkan sehubungan dengan
pemeliharaan barang di gudang.

Rumus : C x Q/2

- Total Cost : Ordering cost x Carrying cost

Reorder point :
Adalah suatu titik yang menunjukkan kapan pemesanan uang persediaan dilakukan
Rumus : days of lead time x daily usage

Merger fundamentals: terminology

Merger adalah penggabungan 2 atau lebih perusahaan dengan tujuan memperkuat dan
meningkatkan kinerja perusahaan serta memperluas atau ekspansi perusahaan
Konsolidasi adalah menggabungkan atau lebih perusahaan dimana perusahaan yang
bergabung menciptakan perusahaan baru, perusahaan lamanya dilebur atau dilikuidasi
Holding company adalah gabungan dari beberapa perusahaan dimana salah satu perusahaan
berperan sebagai pengendali atas beberapa perusahaan lain
Subsidiaries adalah anak perusahaan atau holding company
Vertical merger adalah jenis merger dan berbagai perusahaan dalam suatu garis bisnis tetapi
perusahaan yang bergabung berada pada tingkat yang berbeda-beda
Horizontal merger adalah jenis merger dimana produk atau jasa yang dijual berada pada 1 level
bisnis atau usaha
Konglomerasi merger adalag suatu jenis merger yang dilakukan berbagai perusahaan yang
memproduksi atau menjual produk yang berbeda-beda

Hybrid and derivative securities

Hybrid security adalah surat berharga yang memiliki sifat dan modal
Contoh : preferred stock, financial lease, convertible securities
Derivative security adalah surat berharga dimana tidak merupakan hutang atau modal tetapi
merupakan turunan dari asset yang sering disebut surat berharga lainnya
Option adalah suatu instrument surat berharga yang disediakan untung dibeli dan dijual suatu
asser khusus pada tingkat harga tertentu sebelum jatuh tempo

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Jenis option ada 2 yaitu call option (dibeli sebelum jatuh tempo)
Put option (dijual sebelum jatuh tempo)
Hedge adalah pelindung nilai yang diperlukan untuk melindungi nilai dari resiko atau
perubahan harga
Contingent secutities adalah kesatuan dari berbagagai surat berharga
Leasing adalah suatu jenis pembiayaan atas barang modal (aktiva tetap berwujud) yang
diberikan hak opsi untuk memilih pada akhir masa sewa dan hak untuk tidak menulis kepada
akhir masa sewa
Jenis leasing :
1. Operating lease
- Tidak diberikan hak opsi memiliki barang modal pada akhir periode lease
2. Financial lease
- Pada akhir masa sewa diberikan hak opsi untuk memiliki barang

Tahap leasing

1. Lessee hubungi supplier ingin beli barang pesenan customer

2. Orang lessee negoisasi dengan lessor tentang syarat, bunga, harga
3. Tanda tangan kontrak surat perjanjian
4. Lessor meminta supplier mengirim barang sesuai pesenan yang diminta
5. Barang dikirim dan meminta surat pengiriman di tanda tangan
6. Memberi tahukan barang sudah dikirim
7. Lessor membayar kepada supplier tunai sesuai harga pokok
8. Lessee membayar secara lunas atau cicilan sesuai perjanjian

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